Soaring inflation supported the dollar on Tuesday. The Consumer Price Index (CPI) rose 0.9% in June alone and 5.4% year-over-year, its biggest annual increase since 2008, while the consensus was for slightly more modest inflation of around 4.9%.
Even excluding volatile energy and food products, consumer prices rose sharply. The core CPI was up 4.5% in June year-on-year, compared to 3.8% in May, due to soaring prices for used cars (+45% year-on-year), clothing (+4.9%), airfare, and hotels.
Rising raw material prices, shortages of certain inputs such as semiconductors, and a lack of employees caused manufacturers to pass on some of their increased costs to consumers.
Although the surge in inflation is pushing U.S. real Fed funds rates down to about -5%, which should be negative for the dollar, the greenback has rebounded. Forex traders rightly believe that this rise in inflation strengthens the chances of a quick normalization of the Fed's monetary policy.
The next FOMC meeting at the end of the month will be crucial. Some observers expect the FOMC to announce a reduction in the Fed's massive asset purchase program, currently $120 billion per month.
Indeed, some traditionally dovish officials are in favor of reducing the support measures, such as James Bullard, who believes that it is no longer necessary for the Fed to buy mortgage-backed securities.
However, other officials, including Jerome Powell, continue to adopt a dovish tone, casting doubt on this scenario. The Fed chairman assured Congress yesterday that the central bank would provide “powerful support” to the U.S. economy until it fully recovers, stressing the transitory nature of inflation and the need for continued job growth.
In this uncertain context, the FOMC members' interventions in the media should particularly influence the markets and will therefore be scrutinized by investors.
On the technical analysis front, the DXY dollar price returned to test a major downtrend line on Wednesday but failed to break above it due to Jerome Powell's dovish tone.
Below this oblique, the underlying outlook remains technically bearish and the risk/reward ratio favors sellers.
Note the presence of a bearish RSI divergence which indicates a slowdown in buying pressure. The RSI would give a bearish signal in case of a decline below 50% and the price in case of a decline below the low of the week at 92 points.
In the event of a decline below 92 points, the symbolic threshold at 90 points would be the first major support to watch. A drop below this and below the bullish oblique that runs through the lows of last January and June would be signals for a continuation of the long-term downtrend.
(Chart Source: Tradingview 15.07.2021)
On the other hand, a break above the resistance oblique would be a technical signal for a bullish reversal. The March high at 93.43 points would be the first resistance to watch, followed by the symbolic 95-point threshold. This is the preferred scenario if the Fed finally turns out to be more hawkish than expected.
Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.
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